Secondary transaction volume poised to reach record $100bn-plus by year end

Sep 23, 2021 | News

A record $50bn in secondary deals completed in H1 2021. It is a sign of things to come, with transaction volume poised to reach $100-105bn by the end of the year. Over the last decade the proportion of GP-led deals have increased gradually, surpassing LP-led transactions for the first time in 2020.

The report is based on a survey containing36 questions overall, addressing investors participating in both GP-led and LP-led transactions. Known active secondaries investors globally were surveyed to gain insight into their investment activity.

The Secondary market is experiencing a boom period, exhibiting unprecedented rates of buyer activity and deal flow. Nearly 90% of respondents closed H1 2021 at or above deployment targets for the period, while over 90% were able to evaluate deal flow that either met or exceeded expectations. This can be contrasted to Q3 2020, for which the corresponding numbers were over 60% and 80%, respectively, and Q1 2020, for which only 35% of respondents achieved or exceeded their planned deployment targets.

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Secondary fundraising activity has remained high, with $29bn raised across 23 funds in H1 2021, with over 50% securing capital above their initial targets. Though down from H1 2020, this year is poised to be another successful year for the market, as fundraising activity stabilises from the highs of 2020 at a level firmly above pre-pandemic years. 2020 was a record-breaking year for secondary fundraising activity, with circa $80bn raised across 37 funds. Despite record fundraising levels, it is still the case that over two thirds of market AUM and dry powder is concentrated in the largest 15 firms.

Buyers are optimistic about valuations, with most respondents expecting Q3 net asset values (NAV) to be written up. Over 90 per cent of respondents anticipate NAV to be written up by as much as 10 per cent, with an additional 2 per cent of respondents forecasting write-ups of over 10 per cent. Though over 40 per cent of respondents are seeing average secondary market pricing at a 5-10 per cent discount, c40 per cent are seeing it at par or up to a 5 per cent premium.

Continuation Vehicles tend to price close to par (from 10 per cent discount up to 10 per cent premium), depending on the reference date of the transaction. This represents a significant move past the economic uncertainty caused by the pandemic – at the height of which over 90 per cent of survey respondents required double-digit discounts to deals, with nearly half requiring a discount of greater than 30 per cent – and a return towards healthy valuations and stable pricing

Surge in demand for GP-leds, with continuation vehicles most favored
With heightened activity in the GP-led market likely to continue in H2 2021, Raymond James | Cebile found nearly 80 per cent of respondents regard Continuation Vehicles as their most favoured deal structure.  In their quest for generating alpha, buyers continue expressing appetite for GP-led deals involving companies of sub 1bn EVs in H2 2021 and over 20 per cent of buyers are increasingly expressing appetite for deals involving companies of over $1bn EV during the period (mainly for single-asset continuation vehicles).

Buyers’ least favoured deal structures going forward include tender offers, bridge funds and top-ups, all of which involve a primary / unfunded component that constitutes a blind pool risk that buyers tend to be uncomfortable with. In addition, preferred equity solutions are also less favoured by buyers going into H2 2021 due to their lower than equity returns. Regardless of structure, buyers require strong GP alignment for a deal to be attractive – 80 per cent of respondents noted that lack of GP alignment, including GPs’ intention to cash out and GPs not have enough skin in the game, was a deal breaker.

Source: Private Equity Wire

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